When it comes to deciding on how you wish to invest your regular savings you can generally invest in four areas, known as asset classes. They are:
Cash – bank or building society accounts, for example, carry the lowest amount of risk, but generally will also have the poorest performing returns. This asset class is a suitable option for short term deposits or regular savings but, when you also take into account the eroding effects of inflation, this type of asset may not be suitable for regular savings over the longer term.
Fixed Interest or Bonds – To many the term ‘Bond’ is often misunderstood. Bonds, also known as Fixed Interest and Index-Linked Securities are essentially loans whereby money is lent and in return the Bond issuer agrees to make interest payments to the bondholder. Issuers of Bonds include the UK and overseas Governments, local authorities and corporations. The risk of such investments can be higher than a bank or building society account in that there is no guarantee that you will receive the interest or your initial investment back. However risk, and therefore reward, will vary between issuers, for example is it almost certain the UK government will give you back your money but there is no guarantee a company would. Over the longer term, Bonds have provided a better return than Cash.
Property – Investors making regular savings can invest in Property Funds. With such, your regular savings are pooled together with other investors which is then used to purchase property or related assets. This usually takes the form of commercial property such as shopping centres, offices, warehouses, factories and land but can be used to buy property related shares. Commercial property is rented to tenants and can include supermarkets and shops etc. Returns are based upon rents and the increasing value of the properties. The risk of such an investment includes declining property prices and declining rental markets however, over the longer term Property Funds have provided a better return than Cash and Bonds.
Stocks or Shares – Commonly known as Equities, they are a share in company. Equity investments offer a share in the profits of the company as well as the potential for capital growth. Equities should not be considered for short term investing as values can fluctuate suddenly. Directly investing into a single company also carries a higher risk than investing into an equity fund which spreads the risk over a number of companies. Although seen as the riskiest asset class, compared to Cash, Bonds and Property, Equities have proved historically to be the best performing over the long term.
Most professionals will agree that diversification is the key when it comes to making good investment decisions, over the longer term, and everyone will be familiar with the term ‘Don’t put all your eggs in one basket’. Past performance is also not a guide to future performance and so discussing your needs with a qualified financial professional is important when it comes to striking the right balance between risk and reward.